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Putting details to the incentive auction – FCC asks for Comments on Fact Sheet on auction structure, and prepares for meetings with broadcasters
BlogBroadcastlaw Blog

The FCC on Friday adopted a Fact Sheet on tentative procedures for the incentive auction, by which it plans to buy back spectrum from broadcasters and resell it to wireless companies for wireless broadband uses. The tentative procedures, along with the recent “Greenhill Report” setting possible prices to be paid to television stations who are willing to surrender their channels for the FCC to resell to wireless companies (see our summary here), are setting the stage for a series of meetings with broadcasters to attempt to convince enough to participate in the auction to satisfy the FCC’s goals for the auction – goals that also became a bit clearer from Friday’s releases.

The fact sheet setting out the parameters for the auction is not the detailed notice of auction procedures that some broadcasters may be familiar with from participating in past broadcast auctions. Instead, it is more of an outline of proposed general principles that will be applied to the incentive auction. Initially, it proposes that the FCC would set opening prices for each station – prices at which the FCC would offer to pay the licensee to give up its spectrum. The prices would be set based on an analysis of two factors: (1) the impact that the station would have on the repacking of the broadcast spectrum after the auction because of the interference that it causes and (2) the population covered by the station. If a station agrees to move to the VHF band instead of surrendering its licenses altogether, it would receive somewhere between a third and a half of the opening price if it accepts a high VHF channel, and between 67 and 80% of the opening price for a low VHF channel. According to the fact sheet, the prices that will initially be offered to the broadcaster will be initially set high, and will be lowered as the auction progresses until the prices reach a point where there are just enough broadcasters willing to take the lowered offer to clear the amount of spectrum that the FCC needs to fill the demands of the wireless users. There has also been introduced the concept of a “dynamic reserve price,” setting a limit on how much the FCC is willing to pay some stations for giving up their spectrum, which could conceivably result in the amount that they are offered being lowered even when it is known that they cannot be repacked into the amount of the spectrum that remains available in the smaller post-auction TV band. How much spectrum must be cleared for the auction to go forward?

The fact sheet suggests that the auction will be considered a success if there are 70 mhz of spectrum made available for sale to the wireless companies, which means clearing 84 mhz of TV spectrum because of the guard bands needed to induce the optimal bids for the wireless channels. That means clearing 14 TV channels – significantly less than the 120 mhz (20 channels) that was initially proposed when the FCC’s Broadband Report was released almost 5 years ago (see our summary here), but still a significant amount of spectrum in congested larger markets and in geographical areas where there are numerous TV markets close together. In addition, for the auction to be a success, the FCC would set a “reserve price,” looking to get $1.25 per person in the 40 largest markets from the wireless companies bidding for what are being called “Class 1 licenses.”

A Class 1 license is one where virtually the entire spectrum is “unimpaired” by TV operations. How will such impairment occur? It seems that the FCC contemplates that, at the end of the day, there may still be some areas where not all of the TV stations will be able to be cleared from the TV channels that will be converted to the spectrum to be sold to the wireless users – presumably where enough stations are unwilling to accept the dynamic reserve price established by the FCC. Where the spectrum is “impaired” less than 15%, these will be considered Class 1 licenses used in establishing whether the auction is a success. Class 2 blocks will have between 15 and 50% impairment. Both will be sold to wireless users, with bidders receiving a 1% discount for each percentage of impairment which results from residual TV station (the degree of impairment, it would seem, may not be known until the conclusion of the auction). Spectrum blocks with more than 50% impairment will not be sold given the substantial continuing use by the broadcasters.

In the fact sheet, the FCC suggests that, at each stage of the auction, any ultimate channel assignment made for remaining TV broadcasters will be provisional, as there will be further evaluation as the auction proceeds to try to minimize the number of stations that have to vacate their channels, and to minimize relocation costs of, and new interference created to, TV stations.

These proposals will obviously demand much attention from broadcasters and other auction participants. The two Republican Commissioners dissented from the proposals, suggesting among other things that it was too complex to be understood by many potential auction participants. Some observers have also questioned the idea of the setting the “dynamic reserve prices” upfront, arguing that the initial prices should simply be set by the broadcasters themselves who are interested in potentially selling their spectrum. There is a conflict between the auction proponents who want to maximize the income to the taxpayers and speed the auction process who favor the dynamic reserve prices, and those who are concerned that such prices will limit the return of broadcasters interested in selling their spectrum and perhaps depress broadcaster participation in the auction. There also the fear that, if the dynamic reserved price is rejected by broadcasters, more stations will end up in part of the spectrum otherwise repurposed for wireless, resulting in more “impaired” spectrum.

According to a Public Notice which accompanied the fact sheet, Comments on the proposals are due by January 30, and Reply Comments by February 27.

Trying to simplify the apparent complexity of the auction, and to flesh out the outlines of the auction process, may well be part of the FCC’s upcoming roadshows on the incentive auction. Announced by FCC blog post in mid-November, FCC staff working on auction matters, advised by the Greenhill investment bankers who they have hired, will be hitting the road between January and April, holding open meetings with broadcasters on the incentive auction process. The article lists 50 markets in which the FCC officials tentatively plan to hold meetings, and also states that they are willing to set up one-on-one meetings with broadcasters who want more information about the process.

The incentive auction is moving forward. With an undertaking of this magnitude, it is not surprising that it is not at all without controversy. Many broadcasters with whom I have spoken are uncertain about the process and how they will be impacted by the rules that are adopted, whether or not they decide to give up some of their spectrum. These recent steps by the FCC make a bit clearer the direction in which the FCC intends to move, but there is still a long way to go before the actual auction. Expect these issues to be debated and clarified further throughout the New Year.